Canada’s inflation was stubbornly high in January, defying December’s tax-holiday-driven dip and complicating the outlook for rate cuts from the Bank of Canada. The uptick in the Consumer Price Index has created a crosscurrent of data, challenging the wider expectation for continued policy easing.
However, analysts stress that developments on US tariffs and upcoming data on GDP and employment would have a more significant influence than CPI on the central bank’s decision at its Mar. 12 meeting.
The January CPI report released by Statistics Canada showed Canada’s annual headline inflation rate rose to 1.9% in January after dropping to 1.8% in December.
January CPI Rise Led by Gas Prices
Statistics Canada reported that the CPI increase was led by a rise in gas and telephone services prices, which partially offset the effect of lower food prices in January. This was the first full month that the GST tax holiday was in effect.
Reversing the previous month’s trend, core inflation also edged up, with trim and medium inflation rising to 2.7% (from 2.5%, and 2.6%, respectively, in December). Analysts note these figures are slightly above the central bank’s comfort zone.
Core inflation measures leave out more volatile constituents of the CPI to provide a clearer picture of underlying inflation trends. Trim inflation strips out the most extreme price changes from a selection of goods and services. Median inflation measures price changes at the midpoint of all CPI items. Shelter prices (rent and mortgage costs) rose 4.5% annually and 0.3% monthly in January.
The following are highlights from commentary on the January CPI report, sourced from responses to Morningstar’s requests and analyst notes to clients.
Veronica Clark, economist at Citi
“There has been some surprising stickiness to core inflation recently that could give officials some pause, especially considering the recent weakening in the Canadian dollar.
“For those concerns, I expect [the Bank of Canada] will skip another [interest] rate cut in March. But there are some signs in the inflation data, like slowing shelter inflation, that would be encouraging for the medium-term inflation outlook, and I expect officials to resume cuts again in April.”
Douglas Porter, chief economist at BMO Economics
“No big surprises in today’s report, which is generally a good thing on the inflation front, and we’ll call this one a draw on the interest rate outlook front. However, as the GST holiday lifts from the data in the next two months, the headline tally will likely quickly rise to roughly match current core trends of closer to 2-1/2%, which have been a tad warm for comfort in recent months.
“We continue to lean to the view that the Bank of Canada will pause at their next decision (March 12), although developments on the tariff front may yet have a big say in that call. The possible 25% U.S. tariff on Canada and Mexico still looms for March 4.”
Andrew Grantham, senior economist at CIBC Economics
“As the impact of the GST holiday fades in February and is eliminated fully by March, headline inflation will look a touch stronger again. However, with gasoline prices starting to level off, an easing of inflationary pressure in that area should limit the acceleration in headline CPI.
“The Bank of Canada will be more focused on core measures that exclude indirect taxes, although if the passthrough of December’s tax cut was not full these measures may have been biased upwards slightly recently, and therefore could look softer again in February and March. We continue to forecast a trough of 2.25% for the Bank of Canada’s overnight rate, but the path there will depend on how/if tariff uncertainty is resolved as well as upcoming GDP and employment data.”
James Orlando, director and senior economist at TD Bank
“Headline inflation remains close to the Bank of Canada’s 2% target, but there are signs that price pressures could move higher in the months to come. The GST/HST holiday has officially ended and the downward pressure on overall inflation will unwind. Stripping out this impact, inflation would have been 2.5% y/y, 0.6 percentage points higher than the headline print. Additionally, the three-month annualized trend of core inflation has been tracking above 3%, signaling that core inflation should continue to grind higher.
“The BoC is in a difficult place. Does it weigh the downside risks to the economy in the face of U.S. tariffs, or does it focus on recent economic strength and the impact this is having on inflation? Markets are still pricing for another 25 basis-point cut in March, but price action this morning is paring back some of this. There is plenty of time between now and March 12, and if the [US] President’s first few weeks are anything to go by, a lot could change before then.”
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“Canadian consumers benefited in January from a full month of the federal government’s sales tax holiday. Consumer prices rose just 0.1%, leaving the annual rate of total inflation at 1.9%, up just a tick from last month on base effects. The Bank of Canada’s preferred measures of inflation, which exclude the impacts of tax changes, accelerated more than expected on an annual basis.
“It wasn’t all good news though. The share of the components rising faster than 3% jumped to 33% from 25% in the prior month. That’s an indicator the Bank of Canada closely watches. We continue to believe the Bank of Canada will hit the pause button in March, given that the activity data is also holding up well. But that call is still contingent on tariff news and upcoming data releases cooperating.”
Tu Nguyen, economist at assurance, tax, and consultancy firm RSM Canada
“Inflation has been at or below the Bank of Canada’s 2% target for six months in a row, evidence that price stability has been restored and maintained. With inflation largely resolved, the Bank of Canada’s next move would depend largely on jobs data. If tariffs do not materialize within the next month, the Bank of Canada might pause for a month as the job markets have held up thus far with healthy job gains. But if tariffs and retaliation were implemented, another cut is warranted.”
Stephen Brown, deputy chief North America economist at Capital Economics
“The GST holiday meant that headline inflation remained below the 2% target in January, but there is clear evidence that underlying inflation pressures are building. That suggests the Bank of Canada is getting close to the end of its loosening cycle, although the outlook for monetary policy ultimately hinges on whether [US] President [Donald] Trump soon imposes stiff tariffs on imports from Canada.
“The Bank has shrugged off the recent strength in CPI-trim and CPI-median and so this may not be enough to prevent it from cutting again at its meeting next month, particularly with the 25% US tariff still scheduled to come into effect in a couple of weeks. But the strength of underlying inflation pressures does suggest that, if those tariffs or others of a similar magnitude are not imposed, then the Bank will soon bring its loosening cycle to an end.”
Matthieu Arseneau, economist at the National Bank of Canada
“For the sixth consecutive month, annual inflation in Canada registered at or below the Bank of Canada’s target, which may seem reassuring at first glance. But don’t be fooled, this data masks an upsurge in inflationary pressures in Canada over the past few months. If you remove the impact of the GST holiday on several products you can see that annual inflation is now at 2.6%, or 0.7% above the 1.9% officially released this morning.
“Perhaps the recent pickup in inflation would have convinced the Bank that a pause in monetary easing was appropriate. However, the situation is far from normal. The threat of tariffs should weigh on the Canadian economy, keeping investment projects on hold. In this context, we continue to forecast a 25-basis-point cut in March, although many economic data and political developments could change our outlook between now and then.”
Charles St-Arnaud, chief economist at Alberta Central
“Overall, there is some drag on inflation from the GST holiday; underlying inflation suggests that inflationary pressures are sticky, and prices have increased faster in recent months than the Bank of Canada would want to see. This will not be a welcome development by the central bank. Stronger underlying inflationary pressures, coupled with a relatively robust labor market in recent months, reduce the likelihood of a cut at the Bank of Canada’s meeting in March. With this in mind, it is becoming likely that the Bank will opt for a pause at the March meeting to assess the situation better.”
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